A Few Opinions on the US Economy

Robert Reich, the former Secretary of Labor under President Bill Clinton, wrote an opinion piece for the NY Times today. It is called Totally Spent.

Here are some of the points I agree with from the piece:

WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.

Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.

The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent.

Here are some of the points I disagree with from the piece:

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

Reich is vastly underestimating the value of the entrepreneur in the US economy. Many entrepreneurs are middle class with a limited amount of buying power, but everyone knows they make up the lion share of goods and services sold. Will an increase to the wage of the lower class and lower middle class really help entrepreneurs? Perhaps, but the incentive to be successful is reduced ever so slightly because the raise in wage of the lower and lower middle class is subsidized by the very items they are buying.

What Reich should have focused on instead of tax relief is local investment incentives. For instance, angel investors should get a tax break if and when their investment matures, if the investment was local in nature. What I mean by that is if the investment improved the situation for the average consumer. It could be an infrastructure improvement company or a social based company or a targeted communication mechanism. What is important is that it is end user focused and relatively local in utilization.

Another area where Reich is not looking is at innovation. Many great innovations come from entrepreneurial companies. An area of particular excitement is in the green energy technologies. As efforts in this space begin to coalesce a productivity surge will result. Why? Because the savings in energy use will get shifted from a cost item to a revenue generation item. That isn’t to intentionally ignore the gold rush that will result in the development of many parallel green solutions, but the media will not appreciate a story that has no definitive green energy winner. But that will be the case – no one winner but many tiered successes. The US will not necessarily lead this revolution, but it will play a crucial role particularly because the economies of scale require a US consumer adoption.

Finally, Reich misses the ball on the Baby Boomers. He fails to mention their clout in the economy. He says “Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.” But what happens when their health begins to show signs of deterioration? Will they try to buy years, months, days they don’t have? Will health care spending increase as a result of the rich reaching retirement? I believe so and I think it will result in another form of productivity increases as new medical innovations are implemented.

So to summarize, Reich is in favor of rebalancing the tax of the US population, improving unions, improving schools. I suggest we reward local investment in entrepreneurs by not taxing the gains as the US currently does. I believe that green energy technologies are close to relevancy and I believe health care is the one area a rich person will spend at the same percentage rate as a poor man.


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